SIF Portfolio: A new twist on diversification

11th Jan '17 by Roland Head

18 comments 16474 reads

Ed Croft’s 2017 NAPS feature reminded me of the adage that diversification is the only free lunch in investing.

The NAPS portfolio is made up of 20 stocks, with two taken from each of the ten top level economic sectors. With a few exceptions, the stocks selected are simply the stocks with the highest StockRanks in each sector.

The NAPS portfolio is more strictly rules-based than my SIF Portfolio, but there are some similarities. One of the biggest lessons I’ve taken away from the NAPS portfolio’s outstanding progress is the benefit of diversification.

I hope Ed won’t mind if I borrow the graph he used in the 2017 NAPS article. This shows how the equally diversified NAPS portfolio has beaten an undiversified portfolio of the 20 top-ranked stocks by about 15% in the two years since the portfolio was created:

The blue lines represent diversified NAPS/SNAPS portfolios, while the green line represents the top 20 stocks by StockRank, without any diversification.

One of my biggest concerns about the SIF portfolio has been its ongoing failure to reach my target of a broadly equal mix of cyclical and defensive stocks. The reasons for this are simple enough. For the last couple of years, we’ve been in a market where good quality defensive stocks have been highly valued, relative to their earnings growth. This has prevented them qualifying for my screen.

However, I have turned down a number of opportunities to add apparently successful defensive stocks to my portfolio. Most of these have been UK-listed Russian companies, which I’ve excluded on the grounds that I don’t understand the rules in Russia.

In short, I’ve put my anti-Russia (investment) bias ahead of my diversification requirements. I’m not sure if this was wise, so for 2017 I’m going to flip this rule on its head. If Russian stocks qualify for my screen and can help improve the diversification of the SIF Portfolio, then they’ll be in.

This may have some consequences, the biggest of which is that it will strip out much of the subjective judgement I apply to portfolio stocks. Like most UK investors, I really don’t know much about these companies, or the wider market context in which they operate.

For example, how similar to the UK are the regulatory environments for utilities and banks in Russia? How…

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brucepackard

11th Jan '17

Well that's certainly contrarian...investing in Russia for defensive diversification reasons (ie to reduce risk!)

I'd recommend anyone investing in Russia read Bill Browder's book "Red Notice". Also "Once upon a time in Russia" Ben Mezrich and Masha Gessen's biography of Putin "Man without a Face" are useful background on Russian business culture / attitude to foreign capital.

DWit199

Is the placement of 40 billion shares at 1 ruble (0.014 p) complete yet? What are they doing with the money raised?

Rusty2

Something odd, on Stockopedia this is listed under Electric Utilities & IPPs, however unless I'm going blind, I can't see it listed under that sector, there are 11 listed in the UK. Why is this? Is it because it's Russian?

Roland Head

Hi herbie,

You need to check the "Dual listed stocks" checkbox at the top of the page for it to be visible.

Regards,

Roland

I see, yes that has brought it up.

But it does not appear on the top ranked Stockopedia shares list?

Is Carnival (LON:CCL) not a dual listing? That appears under it's sector.

JohnEustace

I'm not seeing this come up as something I could buy through H-L or Halifax share dealing.

Hi Bruce,

Thanks for the book suggestions! The risk of systemic corruption and opaque corporate governance have kept me away from Russia thus far. But I've started to wonder whether London-listed Russian firms may not be as risky as they are made out to be, from an investment perspective.

To put this in context,I am increasingly inclined to trust the numbers rather than my judgement when appraising a stock.

In fact, I'm planning an article over the next few weeks in which I'll try to quantify the effects of my interventions on the portfolio's returns so far. Should I commit more fully to a rules-based selection approach?

Regards,

Roland

Carnival (LON:CCL) is one of those weird setups where there are two corporations operating as a dual-listed company.

Carnival Corporation is the NYSE-listed entity, while Carnival plc is listed on the LSE. So LON:CCL is effectively a primary listing.

http://www.carnivalcorp.com/phoenix.zhtml?c=140690&p=irol-irhome

Roland

Hi John,

Thanks for flagging this up. Stockopedia lists Federal Hydro-Generating RusHydro PAO (LON:HYDR) as being eligible for both SIPP and ISA accounts, but I'm not sure this is correct.

Both my SIPP and ISA providers (different brokers) say that it isn't eligible. I think the reason is that the UK listing is of ADRs, not actual shares.

See here:

http://www.eng.rushydro.ru/investors/stock-market/stock_exchanges/

The ADR is listed on the LSE, but the underlying shares are listed elsewhere.

I guess this should be available in standard share accounts, just not accounts offering special tax treatments. For what it's worth, it does appear to be available to buy in my IG account.

Roland

There's been no RNS to indicate that the placing is complete, so I guess it's not yet. The amount involved is about £550m, so roughly 10% of the group's market cap.

I'm not sure what the cash will be used for, general corporate purposes or acquisitions, I'd imagine.

Regards,

Roland

Thanks for all of your feedback so far.

Some of today's comments suggest to me that my decision to add Russian firms to the SIF Portfolio looks quite rash to you! In all honesty, it is an experiment. I want to know if the benefits outweigh the risks?

To put this into context, I'm trying to learn (and hopefully demonstrate) whether it makes sense to put rely more heavily on the rules of the portfolio and reduce the amount of stock selection and intervention done by me. More on this in future weeks.

Please remember that the SIF Portfolio is a virtual portfolio, so it's possible to learn by doing without having to foot the bill. Comments made in my weekly articles represent my opinion only, not advice.

As always, please DYOR before considering a real money transaction of any sort.

Regards,

Roland

The Stockopedia news archive for this share is incomplete. Is there a reason?

jjis

12th Jan '17

An observation on your experiment is that your screens criteria may be too restrictive to throw up enough suitable candidates perhaps? I noticed in recent reviews you had been selling quite a few positions & your current screen only has 4 qualifiers two of which are Eastern European operators. I guess it could be that the market has got expensive and if there is a set back your screen may then re-populate with more candidates - I guess time will tell on that.

jjis,

That's possibly true. The number of companies qualifying for the screen has varied widely since I started the portfolio. In the wake of the Brexit sell off there were hardly any qualifiers for a while because of the 1y RS>0 criteria.

That was frustrating because I could see lots of good companies that had fallen on temporary weakness but which I couldn't add to the portfolio.

I will review the portfolio criteria after its first full year (in April) but I'm not inclined to make too many changes too fast, as that will make it hard to keep track of cause and effect.

Regards,

Roland

Howard Adams

Roland

A very interesting new step for your SIF, thanks for the write up. Your article has prompted me to share a comparable experience I have had with a Russian stock.

I created a rules-based, NAPS like, virtual portfolio from US, Europe and UK stocks in November 2016 to experiment with using the wider Stockopedia access across markets and to watch how diversification would play out in contrast to my own UK listed portfolios.

One Russian stock, NK Lukoil PAO (LON:LKOD) , in the Energy sector and the Oil & gas industry passed my screen and went on to gain over 16% in a few short weeks. After I examined it, in line with the thoughts about diversification you have expressed in your article, I have gone on to add it it to my live portfolio as an experiment to try to expand my own thoughts about investing beyond UK-based listings. Whilst placing greater trust in the Stockopedia numbers rather than my own prejudices.

I shall watch your selection with interest and compare it with my own selection.

Regards
Howard

jules2k6

13th Jan '17

Interesting that you have not been fully going by "the rules" if you have been ignoring Russian stocks so far

AnonymousUser252054

Interesting move! A couple of months ago I was looking at Russian mining giant MMC Norilsk (not London listed) and was very impressed with the reassuring depth of information on its website - http://www.nornik.ru/en/investor-relations

I didn't go for it in the end purely as I don't really feel confident enough about predicting metal price movements and there's also the issue of exchange rates which you referred to.

On a historical note I just discovered that Standard Oil were the chief mover behind the US government's decision to invade and attempt regime change in Russia in 1918-20. They originally had little interest in doing so but Standard were furious when the Bolsheviks nationalised their assets.

Zoiberg

15th Jan '17

Trump AND Putin? I think you need a rule to factor in political risk - but that might take you into the realms of chaos theory :-) Will definitely read brucepackard's book recommendations.

SIF Portfolio: A new twist on diversification

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Roland Head

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